Market Commentary 9/29/20

An Oxford Harriman & Company Commentary

The Tug of War Continues

Stocks continued their late summer decline last week ending 9/25/2020 amid fears of the economic recovery losing momentum, as well as fears of rising COVID-19 cases.

Imagine yourself at the beginning of the year. You have knowledge that within weeks a novel virus will emerge that will shut down much of the global economy. Businesses will close, sporting events will be canceled, your daily routine will be altered, travel will be restricted. Finally, tens of millions of Americans will be added to the unemployment ranks.

There is no preventative vaccine, no cure, and the virus can be contracted like the common cold or the flu via airborne contact.

This will turn into a health and economic crisis that no one alive has ever experienced. We believe this is a “one in a hundred-year event.”

It sounds like a script created in a Hollywood studio. However, this is the reality of 2020.

With the foreknowledge that a global pandemic and economic collapse is on the horizon, how might you position your investment portfolio?

Many would have correctly anticipated a swift sell-off in stocks as the virus swept across the globe and the U.S economy went into hibernation. The safety of cash or long-term Treasury bonds would have been attractive.

But consistently picking the peaks and valleys in stocks, or even something close, is a fruitless endeavor. We know that intuitively.

When might the investors who had fled to safety decide to repurchase equities, returning to the proper asset allocation designed to achieve their financial goals?

Would the unending negative news and increasing bearish sentiment have kept them out of the market and in the safety of cash or government bonds? For many, it is difficult to pull the trigger when the news is at its worst, and there’s no light at the end of a dark tunnel.

The swift sell-off in stocks is now in the past. This was violent but short-lived.

As the economy was on the verge of its worst quarterly decline on record , the major market indexes touched bottom in late March and began a remarkable rally that few thought possible.

According to a mid-August article by Barrons1, the Dow Jones Industrial Average registered its best 100-day advance since 1933.

While the Dow has yet to eclipse its prior high, the S&P 500 Index set a record on August 18th and to set six new closing highs by the end of August.2

Strength in large technology stocks have helped fuel the rise in the S&P 500, while strong technology performance has fueled a spectacular advance this year in the Nasdaq.

The pandemic changed the rules. There is no playbook to model outcomes. The Fed, economists, and analysts are all playing by new rules.

Aided by fiscal and monetary stimulus, price action in the market since late March accurately called the bounce in economic activity that began in May and has continued into August.

However, it appears the recovery started to slow in July31. Since late summer, we have been experiencing a market that appears to be in a “tug of war” between optimism for the future and slowing momentum of the recovery as well as COVID-19 uncertainty as we enter the fall.

And while the economy is in recovery mode, it has been very uneven, and has shown signs of slowing momentum. The has been reflected in the September decline in equity prices as some previous positives in the economy have started to become overshadowed by some near-term concerns.

One of the main positives in 2020 has been home sales. Buoyed by low mortgage rates and pent-up demand, housing activity, a traditional leading economic indicator, has surged.4

Also, retail sales, as measured by the U.S. Census, have surpassed pre-COVID-19 levels, due to pent-up demand, generous jobless benefits, and stimulus checks.4

The Atlanta Fed’s GDPNow model, which inputs economic growth into a complex GDP model as new economic reports are released, is tracking an annualized growth rate of 28.5% in Q3 (as of September 1).5

While we could see moderation in activity prior to the quarter’s end, anything north of 16.7% annualized GDP growth, which occurred in the first quarter of 1950 would set a new record.5

Blemishes remain on the economic landscape

As we have been discussing, this had been an uneven recovery with concerns that its momentum has been slowing. While companies have been recalling furloughed workers, total employment remains well below the pre-COVID-19 peak. For example, the U.S economy has yet to reclaim even half of the 22.1 million jobs lost in just March and April.6

The unemployment rate is significantly down from the April peak of 14.7% but remains above the 10.0% peak that occurred in the Great Recession.7

Additionally, first time claims for unemployment benefits have been hovering near one million each week, well above the 665,000-peak registered in the Great Recession.7

Meanwhile, the economy may need another shot of fiscal stimulus, but lawmakers remain at an impasse.

A liquidity crisis was avoided when the Fed flooded the financial system with cash, but economic output remains subpar, and potential solvency issues among homeowners and businesses may create new hurdles down the road.

Final thoughts

We remain optimistic on the long-term prospects for the U.S. economy. However, we are monitoring the short-term risks and the remaining uncertainty regarding the following:

  • The potential fall/winter increases in COVID-19 cases
  • The potential for more violent protests and political unrest
  • The uncertainty surrounding the election, in particular the chance of delayed results
  • Outsized gains in a few technology shares leave the market vulnerable to a pullback. As we have recently witnessed, when a sector is priced at lofty levels, any unexpected surprises can create volatility.

The path of the virus remains our top concern. Even though cases subsided this summer, it is possible we see a second wave in the fall or winter. The election less than two months away, and this could create headline risk.

While markets do not always get it right, they attempt to price in the future. Markets are made up of millions of investors that have a financial stake in their decisions.

Current price action suggests the economy will continue to improve, though the pace of improvement is uncertain.


Dennis P. Barba, Jr.

President & Managing Partner


2. (St. Louis Federal Reserve S&P 500 data).
3. Chicago National Activity Index, which is comprised of 85 monthly economic reports
4. (U.S. Census data, National Assoc of Realtors, NAHB).
6. U.S Bauru of Labor Statistics
7. (St. Louis Fed).

Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.



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